LOS C of the Swaps chapter says:
Explain the effect of an interest rate swapon an entity’s cash flow risk;
Can someone please explain the following?
If a company has floating rate coupon payments to make on an issued bond, and the company enters into a swap to Pay fixed and Receive floating…
Why is it that duration (hence market value risk) raises?
Doesn’t duration increase based on what’s being received? In this case floating is being received?
I understand that cash flow risk would be reduced since the unknown floating payment is converted to a known fixed payment.
Thanks, totally appreciate your help and time!